UK GDP increased by 0.7 percent in Q2 of this year, rising by 2.6 percent based on a year-on-year basis, according to data released by the Office of National Statistics (ONS).
The news helped to boost the GBP/USD by 0.17 percent, with the exchange rates rising from 1.5400 to 1.5429 after the ONS published its economic data.
In the UK, much of the growth seen in the second quarter of 2015 has been driven by greater demand for British exports
In the UK, much of the growth seen in the second quarter of 2015 has been driven by greater demand for British exports, which – along with the country’s robust services sector – has helped fuel an economic expansion over the last four years.
Q2 saw exports up 3.9 percent from the previous quarter. Imports have also risen slightly too, up 0.6 percent.
In fact, the success of British exports in recent months suggests that the UK government’s plan to rebalance the economy is finally seeing some traction, with exports up 8.1 percent from the year previous – the biggest increase in nearly four years.
With the UK economy going from strength to strength, and wages gradually beginning to improve, policymakers at the Bank of England must be feeling more comfortable about the prospect of raising interest rates.
Similarly, across the pond, the US Federal Reserve is no doubt weighing up whether or not to raise rates in September after its economy performed well above expectations, with Q2 growth rates being revised from 2.3 percent to 3.7 percent.
But interest rates, despite the positive GDP figures, may stay put, as increased market volatility caused by China’s decision to devalue its currency, along with the People’s Republic seeing its economic growth slowing somewhat, has prompted central banks to have a rethink.
Moody’s Investors Service is the latest organisation to revise its predictions for global growth in the coming year. Previously estimated at 3.1 percent, the expectation for economic growth among the G20 countries has now been reduced to 2.8 percent.
According to a press release published by the ratings agency on August 28, the downgrade reflects the prolonged negative impact of China’s economic slowdown. Moody’s also predicts less GDP growth for China in 2016, reducing it from a previously estimated 6.5 percent to 6.3 percent, due to declining exports and investment.
Experts believe that the worldwide slowdown could be due to structural shifts in the global economy
“Slower growth in China makes a significant rebound in commodity prices in the near term unlikely. A more prolonged period of low commodity prices will lead to muted export revenues and investment for commodity-exporting G20 economies,” states senior VP Marie Diron in the press release.
Continued negative growth is expected in emerging economies Russia and Brazil, while Japan and South Korea also face falling export demand from China in 2015.
The new forecast released by Moody’s falls in line with other figures recently published, indicating that the pace of the global economy has indeed slowed. The World Trade Monitor June 2015 report states that the first half of the year experienced the worst world trade levels since the 2009 financial crisis. According to the report, which was published by the Netherlands Bureau for Economic Policy Analysis on August 25, global trade fell by 0.5 percent during Q2, prompting a more avid debate as to whether globalisation has reached its peak.
Both sets of figures indicate that a three-decade long trend of hyperglobalisation has finally begun to unwind. For 30 years, global trade consistently grew at double the rate of GDP, which can be largely attributed to rapid developments in technology and transportation. Yet for the second year in a row now, world trade will grow at around the same rate or less than GDP growth.
Experts believe that the worldwide slowdown could be due to structural shifts in the global economy, which include an attempt by China to transition from an export-driven economy and new energy dynamics in the US. Despite mounting indications suggesting that globalisation has in fact reached its peak, there are no signs at present that the trend is in reverse, nor that previous levels will ever recur.
Following weeks of volatility, a rally in oil prices should provide investors with some respite. After two big pipelines in Nigeria went down and plenty of good news from the US economy, oil prices rallied by more than they have in over six years. Brent crude jumped by $4.42 to $47.56, the largest jump since late 2008, while the US crude price benchmark, the West Texas Intermediate, reached $42.56 after a price increase of $3.96 – the highest since 2009.
Stronger US economic growth figures and the surge in oil prices suggest the Federal Reserve may raise interest rates in September
The cost of oil hit record lows across 2014 and 2015, with prices seeing their largest losing streak since 1986. Earlier in August, prices hit a new six year low with Brent and US crude futures falling below $45 and $40. According to BMI Research, the recent rise is just the start, some reports suggest.
The price rise is due to both the downing of a major pipeline, leading to the prospect of restricted supply, as well as positive economic news. US economic growth figures have been revised upwards. Greater corporate investment has led to the annualised rate of growth to be revised from 2.3 percent to 3.7 percent.
Stronger US economic growth figures and the surge in oil prices suggest the Federal Reserve may raise interest rates in September, after global economic turmoil cast doubts on the expected hike. Senior officials from the Fed are currently meeting in Jackson Hole, Wyoming to discuss the issue.
Both the rally in oil and revised US growth figures should bring calm and recovery to markets, after a number of bearish days. “A healthy upwards revision to US GDP should act as a much needed soothing balm for investors after the turbulence of this week,” Nancy Curtin, Chief Investment Officer at Close Brothers Asset Management, told the BBC.
Indonesia’s finance ministry has announced that it will give tax holidays of up to 20 years to foreign investors in six specified sectors. The decision is the latest prong in the new economic package that is presented by President Joke Widodo, also known as Jokowi, in a bid to improve the country’s flagging economy.
The series of bold moves indicates the ardent endeavour by the incumbent regime to improve Indonesia’s flailing economy
Companies eligible must invest a minimum of $71m; in return they could receive a tax break ranging between 10 and 100 percent. The new regulation hopes to prop up pivotal industries, including machinery, chemicals, maritime transport, as well as upstream oil and gas enterprises. The initial period for the tax holiday will be between five to 15 years, with a possible extension of a further five years. According to The Jakarta Post, the initiative will enable companies to earn twice the revenue that previous regulations permitted.
Jokowi had a busy August implementing various changes aimed at reversing the current trend of slow growth. August 12 saw the appointment of new ministers in trade and finance in an attempt to improve policy-making procedures. Then on August 20, the president instructed his cabinet to carry out considerable deregulation measures in order to improve the country’s investment climate.
The series of bold moves indicates the ardent endeavour by the incumbent regime to improve Indonesia’s flailing economy. But after less than a year in power, the economy’s performance under the leadership of Jokowi continues to worsen, with many arguing that it can no longer be considered as ‘emerging’. Restrictive regulations are still a major obstacle, together with stifling red tape and high levels of corruption in business. Inadequate infrastructure is also to blame, but various much-needed projects have yet received the go ahead from the country’s premier. Given Jokowi’s latest stratagems, it appears that he is finally on the right path and getting to the crux of the issues afflicting the economy. Yet only time will tell if this new direction endures and is enough to turn things around for South East Asia’s largest economy.
Economists predict that Switzerland’s GDP has dipped for the second quarter in a row, indicating that the economy faces recession for the first time since 2009. Since scrapping its currency cap in January, which had sent the Swiss franc skyrocketing by up to 30 percent, the country’s export market continues to decline.
The Swiss economy also contends with plummeting pricing and sluggish manufacturing
According to Switzerland Global Enterprise, exports fell by a nominal 2.6 percent in the first half of the year, while a survey carried out by Credit Suisse claims that SME export sentiment in Q3 2015 hit a record low as a result of the strong franc.
The Swiss economy also contends with plummeting pricing and sluggish manufacturing, while tourism to popular ski resorts has also taken a hit as costs for holidaymakers surged. Although a drop in exports was anticipated following the decision to adopt a free float system, the level of weakness in investment and private consumption is somewhat unexpected.
While 2015 has proven to be a rocky year for the Swiss economy, things may be looking up as the Franc began to slip in August to its lowest levels since the currency cap was eliminated seven months ago. The continued stagnation of oil prices and recent assurance that the eurozone will not suffer from the shock of a Grexit, are likely to also have a positive affect on the Swiss economy. That being said, China’s economic slowdown may see detrimental consequences unfold in the global landscape – which could in turn have a deep impact on foreign demand for Swiss-made luxury goods.
A clearer picture of the current state of the Swiss GDP will be given on August 28 as the latest figures are released.
Economist Gareth Leather tells World Finance that China’s next step in capital market reform effort should include less intervention in the stock market and a more liberalised approach to setting interest rates.
Come back later for a full transcript of this video.
According to figures from the Netherlands Bureau for Economic Policy’s World Trade Monitor, there has been a sharp contraction in world trade volume this year. The first quarter of 2015 saw a 1.5 percent decline, followed by a 0.5 percent fall in the second quarter – amounting to the biggest recorded decrease in world trade in six years.
Principally, China has seen its rate of growth figures dwindle, taking with it its stimulus for the world economy
For decades it has been a generally accepted rule that the growth of world trade, outside of specific circumstances, outstrips the growth of the global economy. As a paper published at Brown University by Mark Dean and Maria Sebastia-Barriel notes, “between 1980 and 2002, world trade has more than tripled while world output has ‘only’ doubled. The rise in trade relative to output is common across countries and regions.” Whether or not these latest figures point to an end of this trend – suggesting the world economy has surpassed the peak of globalisation – depends on what this slowdown of trade is attributed to.
The contraction in world trade may be seen as stemming from a number of slowdowns within the global economy. Principally, China has seen its rate of growth figures dwindle, taking with it its stimulus for the world economy. At the same time, 2015 has seen Europe’s recovery slow, further weakening global demand. These could be seen as temporary blips in the world economy causing a downturn in trade figures, suggesting trade will once again pick up and return to normal patterns.
However, more structural changes in the global economy could be behind the contraction in trade. As the Financial Times notes, there is “a pattern of manufacturers deciding to shorten their global supply chains and bring production closer to home as part of a “nearshoring” and even “reshoring” movement.” Further, the position of certain countries within the global economy has recently been subject to change, such as the US turning from a net energy importer to exporter, and China seemingly transitioning away from its export-led model of growth, both of which would create a toll on world trade volume figures.
The People’s Bank of China has cut its key lending rate in a bid to stem a gathering stock market collapse and, in doing so, arrest mounting fears concerning the country’s slowing growth. Less than 24 hours after “Black Monday” hit, so-called by local media when Chinese stocks suffered their biggest single-day slump since 2007, the central bank has responded by slashing its rates and pumping liquidity into the banking system.
The interest rate cut is the country’s fifth
since November
The interest rate cut is the country’s fifth since November and will see the key lending rate reduced to 4.6 percent, down from 4.75 percent, whereas the bank’s reserve requirement ratio stands at 18 percent, down from 18.5 percent previously. The latter means that the banking sector will be given more capital to play with at a time when many have been reluctant to lend, for fear of default.
According to the People’s Bank of China, the measures were taken in order to reduce “the social cost of financing to promote and support the sustainable and healthy developments of the real economy.” However, many analysts believe that the rate cut is an overdue response to recent losses on the stock market, and the consensus is that not acting sooner contributed to “Black Monday”. The news is not all negative, and many have been keen to point out that the Shanghai index was up 43 percent on the year previous, as of Black Friday’s end.
The IMF forecasts that China’s growth for this year will come in at 6.8 percent, slightly less than the bank’s seven percent target; and the slowdown has led investors to believe that there will be knock-on effects for companies around the globe. With many reliant upon the world’s number two economy for growth, any negative news for China is negative for profitability, and markets have suffered greatly as a result.
De Beers, the largest diamond producer in the world, has reduced its prices by as much as nine percent amid falling demand and mounting pressure to reduce supply. A general slump in commodities across the globe has been felt particularly in the luxury goods sector, including of course, fine jewellery and diamonds. Moreover, China, a key growing market for diamonds, has been hit significantly because of the country’s slowing economic growth and the tumbling stock market.
De Beers faces increasing pressure from other players in the industry
As a result of the global economic landscape, De Beers faces increasing pressure from other players in the industry, including cutters, polishers and traders, as they contend with their own falling sales and shrinking margins.
New fashion trends, which see the demand escalate for coloured gemstones, such as rubies, sapphires and emeralds, have in turn caused a decline in sales of diamond-encrusted jewellery. The growing popularity for less expensive alternatives is naturally enhanced further by economic fluctuations in both key and emerging markets. While a credit shortage from Antwerp Diamond Bank, a source of finance for 80 percent of the city’s industry players, adds further strain to the $80 diamond business. The gradual deceleration of the bank’s activities was decided by KBC Groep NV Yinren Group following the unsuccessfully completion of the subsidiary’s sale last September.
Twice so far this year, De Beers has reduced its production target from 34 million carats to between 29 and 31 million carats. The drop in production has led to Botswana, the biggest exporter of diamonds and where De Beers mines are predominately based, to reduce its GDP growth forecast by almost half. Despite starting the year with expectations of expansion at 4.9 percent, the Finance Ministry reduced the figure to 2.6 percent in August. “The downside risk to the projections continues to be the country’s high dependence on diamonds, whose demand and prices are subject to global fluctuations,” Bloomberg reported the Ministry as saying.
From south east Asian currencies, to tumbling commodity prices, to the Chinese stock exchange – to describe markets around the world as unstable would be an understatement. As a result, the Chicago Board Options Exchange Volatility Index – known as the VIX – has reached its highest point since 2011.
From Malaysia to Russia, emerging market currencies have been hitting record lows against the dollar
Often referred to as the “investor fear gauge,” the VIX shows the market’s expectations of volatility for the next 30 day period. Quoted in percentage points, anything over 30 is expected as showing a high degree of expected volatility; the surge of the VIX in the last few days to over 40 reflects a deep fear within US equities markets. Such fears stem from pessimism over the conditions of the world economy.
China, the source of much of the world’s economic growth, has seen a slowdown – with its largest recorded fall in manufacturing growth since 2009 recorded last week. Further, after an unprecedented tumble in its stock markets through June and July, forcing government action, the week of August 24 saw further declines. China’s recent unprecedented RMB devaluation has further allayed fears that the world’s second largest economy is in trouble.
Falling commodity prices have also hit emerging markets, of which they are usually exporters, hard. Stemming from both an actual slowdown in the Chinese economy and fears of further deterioration, commodity prices have fallen. As the FT notes, “a broad index of commodity prices slid to the lowest point of this century.” Further, oil-dependent nations have suffered due to an Opec induced glut in the market forcing prices to a six-year low. From Malaysia to Russia, emerging market currencies have been hitting record lows against the dollar.
Victor Vargas is one of Venezuela’s top entrepreneurs: president of BOD and numerous other Latin American banks, he is leading the charge in supporting micro-businesses in the country. He describes the micro-business landscape in Venezuela, how Venezuelan banks do things differently, and how he hopes his children inherit his values.
World Finance: Victor Vargas is one of Venezuela’s top entrepreneurs: president of BoD and numerous other Latin American banks, he is leading the charge in supporting micro-businesses in the country. He joins me now.
Victor, what are you doing to help micro-entrepreneurs to start up their businesses in Venezuela?
Victor Vargas: Probably one of my important concerns in my life is my country.
Venezuela probably needs now more than ever our help. I mean the people, normally: they do business in the street. You know? They put up a small sign, and maybe sell some kind of merchandise.
These people are victims of the people that give financial possibility to do their business. We try to work with them. We have now five different schools in Venezuela. And if you are these kinds of people, and you have interest in trying to be a small entrepreneur, a micro entrepreneur: you can go to these schools, you can study for three months, and you can graduate yourself into an entrepreneur. Because when you finish your course with success, immediately the bank will give you credit in order to start your business.
And this year we have had 20,000 people graduated from these schools. And our goal is to double this figure for 2016.
You know, for me, this is my project. I love this project, I love these people – because you see the reactions of the people when they look back and say, ‘I was there, less than six months ago! I now have my small business!’ And when I talk to everyone about this, I say, ‘This is not for now; this is for the rest of your life. Probably, this business will be there for your kids, and you’re doing something for your family.’
This is very important: the value of this project is amazing for us.
World Finance: Tell me about BoD – how did you grow the bank?
Victor Vargas: BoD started something like 58 years in Zulia state. Our goal at that time was to try to grow the bank into the top five banks in the country. That was a success: now we are number four, number three. And we are very happy with our success.
Today, BoD has around six million different customers. And of these six million customers, 4.8 million are doing transactions every day.
World Finance: How did you attract such a strong customer base? How do you set BoD apart from your competitors?
Victor Vargas: All the banks are very good banks. If you have a bank and you say, ‘My bank is better than your bank!’ – that’s not true.
All the banks have exactly the same services. Our goal in this is to do things differently. And we speak directly the client.
In Venezuela, people like to speak with their banker. They feel they’re part of the family. They speak like, ‘I want to speak with my assessor! Give me some kind of advice in order to use my money.’ They can call and say ‘What happened with me,’ or, ‘Can you see me this afternoon? I would like to speak with you.’
Now, we have four thousand people in service of our customers. They’re executives. And normally they attend directly: person to person with people. And you can speak with them through the web, you can speak through WhatsApp, or Blackberry, or something like that.
Our goal is: you call, you have an answer. You can all the time speak with your financial assessor. That’s what works in Venezuela.
World Finance: As well as your commitment to supporting Venezuelan business owners, you’ve invested heavily in culture and the arts – why is this so important to you?
Victor Vargas: The opportunities in Venezuela to develop culture and education are few. It’s not like Spain or the US. The level in Venezuela in this area is not the best level you can do. You know, I mean, probably, in my condition, if you have the possibility with 4,000 direct employees in Venezuela: you need to do something for these people.
We operate the most important culture centre in Venezuela: in Spanish it’s the Centro Cultural BoD. It’s very active in culture, in different kinds of areas; in the arts,theatre and music.
Our expectation is to be ready in 2017 with four different cultural centres in Venezuela. And we would be very proud of that, you know? It’s important, it’s necessary, and it’s our commitment. For me it’s compromise with my country and my people.
World Finance: Your country is clearly extremely important to you, but I also know your family is a large part of your life. Are you trying to pass on these same values of helping others to your children?
This is a very smart question. You know… probably? My expectations would be that my kids do exactly what I’m doing right now! But you never know! I have two young kids, from my second marriage. We try to give to our kids a very good education, a clear concept about family – that’s important for us, because everything is coming from the family. If you have a very good formation in your family, you’re going to be a very good citizen in your country, you know?
On August 24, Prime Minister Shinzo Abe announced that the Bank of Japan has fallen short its two-year inflation-rate target of two percent, but that it is “acceptable”. The premier expressed to the Japanese Parliament that he has full confidence in the monetary policy of the central bank’s governor, Haruhiko Kuroda – thus indicating that the bank is not under pressure to further expand its massive stimulus programme.
The two percent target has now been moved forward to September 2016
The two percent target has now been moved forward to September 2016, although many experts believe that this new deadline is also over-ambitious.
Kuroda has expressed his willingness to expand the stimulus programme, yet policymakers fear that this could lead to the depreciation of the yen and further raise the cost of living, as well as the cost of imported goods.
While Japan continues to face on-going economic domestic issues, the continued slump in global oil prices is the principle reason behind price weakness. Although there have been promising developments in the country, such as the tightening of the labour market and reduction in the unemployment rate, they have not yet translated into increased consumer spending. In spite of a short-term rise in May, household spending unexpectedly fell once again in June, thereby maintaining an enduring and disappointing pattern of decline.
As illustrated by the performance of the Japanese economy this year, the stimulus programme alone is not enough to reach the two percent inflation target, nor to mitigate against the risk of sustained price decline and deflation. Yet, hope still exists through the export market – large corporations, such as Toyota, Nissan and Honda experienced a boost in profits this year, which in turn led to increased employee wages – such mechanisms could be the solution to fuel spending and in effect, recovery.
Speaking at a press conference on August 22, IMF executive director Carlo Cottarelli warned the watching media that it was “totally premature to speak of a crisis in China.” The warning came in response to mounting challenges for the world’s number two economy, with an economic slowdown stock market slump chief among them.
Stock markets have taken a more than 30 percent hit since the mid-point of the year, mostly in response to poor economic data
Stock markets have taken a more than 30 percent hit since the mid-point of the year, mostly in response to poor economic data and the realisation that growth in China is far less than many have grown accustomed to. The slump has been coupled also by panicked predictions for the future of the Chinese and global economy, though Cottarelli has been quick to reassure investors that the reduced rate is a consequence of “necessary” adjustments.
The high-ranking IMF official insisted that monetary policies had been very expansive in recent years, and, as such, the slowdown is part of the transition to safer and more sustainable growth. “China’s real economy is slowing but it’s perfectly natural that this should happen,” said Cottarelli, according to Reuters report. “What happened in recent days is a shock on financial markets which is natural.”
The claims are closely in keeping with the IMF’s recent China predictions. In a conference call earlier this month, Markus Rodlauer, Deputy Director of the organisation’s Asian Pacific Department and Mission Chief for China, said: “This transition is challenging, but the authorities are committed to achieve it. They have made progress in reining in vulnerabilities built up since the global financial crisis, and have embarked on a comprehensive reform program.”
The IMF forecasts still that GDP growth will clock in at 6.8 percent for this year, which, although less than last year, is still close to Chinese authorities’ own target of seven percent.
Following a tumultuous but short time in office, leader of the ruling Syriza party, Alexis Tsipras, announced his resignation on August 20. It is expected that the second and third largest political parties will waive their right to form an administration, instead approving snap elections. Experts predict that the national vote will take place earlier than the previously indicated date, September 20.
The television address given by Tsipras was made on the same day that Greece received €13bn – the first part of a new €86bn bailout package, which will be given over the next three years. The payout enabled the government to fulfil a debt repayment of €3.2bn to the ECB, thereby allowing it to avoid default.
Greece’s economic hole is so deep that loans are simply not enough to fill it
During his speech, Tsipras said that it was now up to the people to decide if the agreement reached with Eurozone leaders is enough to overcome the current situation the country faces. “I want to be honest with you. We did not achieve the agreement we expected before the January elections,” he said. “I feel the deep ethical and political responsibility to put to your judgment all I have done, successes and failures.”
Tsipras passionately took to his post in January, winning through promises to alleviate austerity and bring relief to the Greek people. Despite starting with such conviction, over the course of the past seven months Tsipras has gradually shifted from this strong stance and relented to the very conditions that he initially rejected. After months of laborious and unsuccessful negotiations, the prime minister approved the kind of package that his predecessors adopted just a few years before – making more enemies in Europe and within his own party in the meantime. In an unsurprising move, on August 21, 25 MPs within Syriza broke away to form their own party, Popular Unity.
From the beginning of his controversial term, it was evident that Tsipras would have no choice but to agree to the austerity measures required to secure a new bailout deal. To his credit, Tsipras tried ardently to negotiate a better package, for which he still has support from Syriza voters, but simply put, the economy is not yet in a position to dismiss tax rises, the ‘solidarity tax’ for the unemployed and pension cuts. Of course, it is dire for those living in increasingly impoverished conditions for several years now, but not enough has been done for the situation to be otherwise. Greece’s economic hole is so deep that loans are simply not enough to fill it. The fundamental shift needed starts with tax, specifically a tax to those that avoided paying for so many years. Until this is achieved, the poorest will continue to be hit hardest of all, while the economic future of the country maintains a bleak outlook.
